Wednesday, September 17, 2008

Is McCain campaign economic adviser Phil Gramm, the former U.S. senator from Texas, partially to blame for the subprime crisis engulfing Wall Street? Some Democrats and liberals have been trying to make that case. It was the Gramm-Leach-Bliley Act that in 1999 repealed the Depression-era Glass-Steagall Act and allowed banks, securities companies, and insurance companies to directly compete with one another and led to the creation of financial conglomerates like Citigroup.

Which should tell you volumes, grasshopper. You would do well to remember, as well, grasshopper, that the Engineer of the Straight Talk Express was one of the Keating Five. You're too young to remember the savings and loan crisis, grasshopper, from the eighties:

"You know, George, I feel that in a small way we're doing something important, satisfying a fundamental urge. It's deep in the race for a man to want his own roof and walls and fireplace. And we're helping him get these things . . ."

-- Peter Bailey to his son George in It's a Wonderful Life

In the 1946 film, George Bailey took that advice to heart and, despite the requisite dramatic difficulties, made his family's building and loan association a pillar of the community. But in real life, the outcome has been much different. America's failed savings and loans have become the country's biggest, most scandalous financial mess. Devastated by a legacy of bad management, rampant fraud and inept Government supervision, more than 500 of the 3,150 federally insured thrifts had fallen into insolvency as of the beginning of last year. Because the U.S. failed to own up to the problem and launch a major rescue soon enough, the cost has now grown higher than almost anyone had imagined. Says Michigan Democrat Donald Riegle, chairman of the Senate Banking Committee: "We've never faced a problem of this scale. The answers aren't going to be happy ones."

Last week President Bush came forward with a long-awaited bailout plan in which he sought to spread around the unhappiness in an evenhanded way. Said Bush: "Nothing is without pain when you come to solve a problem of this magnitude." His program will require taxpayers and S & Ls to share the burden of a rescue that will cost an estimated $126 billion during the next decade. The taxpayer portion would amount to about $60 billion, which would be contained in the federal budget over the next ten years. The Government would borrow $50 billion by issuing 30-year bonds to be repaid through revenues collected from S & Ls. Including the interest expense, half of which will be borne by taxpayers, the total package could cost $200 billion or more over the course of three decades.

That's Time magazine in 1989, talking about Bush 41, not the current edition. The savings and loan crisis had several causes, as the linked quote suggests, but one of them was loosening of the regulation of savings and loans. Questions were raised about campaign contributions received by John McCain from Charles Keating. Keating was one of the people who used the more permissive regulatory environment to engage in conduct that was found to be fraud, racketeering, and conspiracy. It was claimed that contributions were made to the Keating Five to secure their help against regulators who were investigating Keating; the Senate Ethics Committee did not find that there was a connection between Keating's contributions and McCain's help.

But you would think, though, that the consequences of the failure of financial services regulation would be indelibly stamped into John McCain's memory. That's why his choice of Phil "you're just a bunch of whiners" Gramm is so significant, and why his claim to be in favor of adequate regulation of financial services now is so hollow.